USDA Wheat Baseline, 2014-23

Each year, USDA updates its 10-year projections of supply, utilization, and prices for major field crops grown in the United States, including wheat (see Overview of the USDA Baseline Process for more information). One key use of the projections is as a “baseline” from which to analyze the impacts of potential policy changes affecting U.S. agriculture.

This discussion summarizes analysis underlying the wheat projections for 2014-23. Details about projections for the U.S. macroeconomy, other U.S. crops, U.S. livestock, farm income, and U.S. and global agricultural trade can be found in the Agricultural Baseline Projections topic page.

The U.S. wheat sector faces many long-term challenges:

The long-term projections point to smaller U.S. wheat planted area compared to recent years. The smaller area is a continuation of a long-term trend, as wheat’s profitability relative to other crops, particularly corn and soybeans, has declined.

The sharp decline in U.S. domestic per capita food use of wheat since 2000—arising from changing consumer preferences—appears to have ended, or at least, slowed. In the future, U.S. total wheat consumption is projected to grow at the same rate as the population.

Internationally, in addition to traditional global competitors (Canada, Argentina, Australia, and the European Union), Russia, Kazakhstan, and Ukraine have emerged as new competitors, particularly in years when their production is high. The overall result in the projections is a smaller U.S. share of an expanding world wheat trade market.

Supply Background

U.S. wheat planted area has trended down for many years, but the United States remains a major wheat producer. Several long-term factors contribute to expectations that U.S. wheat acreage will continue to decline. Nonetheless, the United States remains a major wheat-producing country, with output exceeded only by China, the European Union, and India. In the United States, wheat ranks third among field crops in both planted acreage and value of production, behind corn and soybeans.

Policy changes have influenced U.S. wheat area. U.S. wheat area has varied widely during the past half-century, peaking in the early 1980s. Wheat area dropped off sharply in the mid-1980s, primarily because of relatively large Acreage Reduction Program (ARP) levels implemented when Government-owned stocks of wheat were very large. By 1987-88, farmers who participated in this voluntary program to be eligible for commodity nonrecourse loans and deficiency payments had idled nearly 30 percent of the national wheat base acreage. Wheat area recovered in the late 1980s through the mid-1990s as stocks declined and prices rose, thus lessening the need for ARPs. The Conservation Reserve Program (CRP) also lowered ARPs. ARPs were eliminated under the 1996 Farm Act, starting with the 1996 crop.

The introduction of full planting flexibility in the 1996 Farm Act enabled farmers to switch to alternative crops or to idle their land (beyond program idling) without affecting future program benefits. Planting flexibility increased competition for area among corn, oilseeds, and wheat, which put downward pressure on U.S. wheat acreage. Planted wheat area in the United States is down by about 30 percent, from an average of 85 million acres in the early 1980s to an average of 56 million acres over the past 5 years.

Wheat area has dropped off in the United States as farmers have switched to alternative crops offering higher returns or taken their land out of production. Enrollment in the CRP is concentrated in those regions where wheat production predominates. About 55 percent of the land enrolled in the CRP is located in the Plains States, stretching from Texas to North Dakota and Montana. USDA estimates that about 7 million acres of current CRP land had been planted to wheat or in a wheat/fallow rotation prior to enrollment in the program.

Wheat land switched to other uses because of changing technologies. In the traditional wheat-growing areas of the Plains, there has been a trend since the early 1980s to reduce fallowed area by planting alternative crops and lengthening crop rotations. In addition to flexible timing, the planting of alternative crops, such as corn and soybeans, is facilitated by the increased use of reduced-till and no-till methods, which increase water storage in the soil and allow for larger crop yields. For example, in western Kansas, the historical wheat/fallow rotation has been most commonly replaced by a rotation of wheat/grain sorghum/fallow, in which wheat is planted one year out of three instead of one year out of two. Though cropping intensity increases, wheat is planted less frequently.

Movement of wheat acreage to row crops, such as corn and soybeans, on the Plains also reflects the rapid pace of genetic adaptations in these alternative crops. New varieties of corn and soybeans can be planted farther west and north in areas with drier conditions or shorter growing seasons. Plus, weed control is far easier with the development of herbicide-resistant corn and soybean varieties (see the Agricultural Biotechnology topic page for more information).

The pace of genetic improvement has been slower for wheat than for some other field crops, resulting in slower growth in wheat yields, which makes wheat a less attractive cropping option for many farmers. Genetic improvement for wheat has been slower because of genetic complexity and because of lower potential returns to commercial seed companies—factors that discourage investment in research. For instance, many wheat farmers, particularly in the Plains States, use saved seed from the previous year’s crop instead of buying from dealers every year. This practice sharply reduces the potential market for branded commercial-seed wheat and, thus, investment in seed development research. In contrast, farmers have to buy seed corn each year because seed saved from a hybrid cannot be used for a subsequent crop. This situation creates a large annual market for seed companies to sell seed corn and generates the returns to investment needed to finance breeding programs to develop new varieties.

Wheat disease is also a factor. Concerns about wheat diseases in the Northern Plains—particularly scab (head blight) in North Dakota and Minnesota—have influenced planting decisions since the 1990s and will continue to be a factor in the future. The increased incidence of this disease may stem in part from larger corn plantings and reduced tillage practices in traditional wheat areas in the Northern Plains. Both activities provide hosts for disease organisms.

Wheat’s share of planted area has declined in the Plains. The trend of planting more corn and soybeans on acreage traditionally planted to wheat can be illustrated by examining data for Kansas and North Dakota, the country’s two largest wheat-producing States. In the early 1980s, wheat accounted for 80-90 percent of the total wheat, corn, and soybeans planted in these States. In recent years, wheat’s share has dropped to about half of this three-crop total.

Ethanol expansion in the United States affects wheat and most other field crops. The large expansion in ethanol production that has taken place in the United States has affected virtually every aspect of the field crops sector, from domestic crop utilization and exports to prices and the allocation of acreage among crops. The primary ethanol feedstock in the United States is corn. Market adjustments to this increased corn demand extend well beyond the corn industry—raising corn area and contributing to declines in wheat area.

The rate of expansion of ethanol production is expected to slow dramatically in the years ahead, so it should have only a modest further impact on acreage for wheat. The U.S. ethanol market has become mature as declining gasoline consumption limits the amount of ethanol that can be added to the finished gasoline supply—the so-called blend wall.

Demand Background

Just as U.S. wheat production faces pressures from multiple factors, several domestic and international market factors underlie long-term developments for U.S. wheat demand during 2014-23.

Decline in U.S. per capita flour use slows in recent years. Per capita all-wheat flour use for 2012 is estimated at 134.4 pounds, up 1.9 pounds from the 2011 estimate but down 3.9 pounds from 2007, a recent peak. The 2012 per capita food use is down 11.9 pounds from its level in 2000, when flour use started dropping sharply, apparently as a result of increased consumer interest in low-carbohydrate diets.

Historical per capita flour use. For nearly 100 years, until the 1970s, per capita wheat use declined in the United States as diets became more diversified. Wheat use dropped from over 225 pounds per person in 1879 to a low of 110 pounds in 1972. By 1997, use had rebounded to 146.8 pounds per capita. The overall growth in per capita use that occurred between 1973 and 1997 reflected changes that included the boom in away-from-home eating, promotion of wheat flour and pasta products by industry organizations, and wider recognition of health benefits stemming from eating high-fiber, grain-based foods.

This growth ended in 1997 as a result of changing consumer preferences, including consumer interest in diets with fewer carbohydrates. Interest in these low-carbohydrate diets spiked in 2000, and the sharp drop in per capita flour use that began in 2000 seems to have ended.

Mill use efficiency improved with high prices in recent years. The flour extraction rate varies, in part, with the diligence with which mills are adjusted to the plumpness of the grain kernels to optimize flour extraction. The higher the price of wheat, the greater the economic benefit for managers to continuously adjust their mills to optimize the extraction rate. Plumpness is greater when the wheat crop is not stressed by moisture shortages during the grain-filling production stage.

High rates of flour extraction mean that fewer bushels of wheat need to be milled to produce a given quantity of flour. At 76.7 percent, the 2012/13 rate was up slightly from the 76.3-percent rate for the 2011/12 marketing year. The extraction rate for the 3-year interval of 2008/09-2010/11 averaged 77.0 percent. These compare with the average monthly flour extraction rate from 1990/91 to 2007/08 of 74.6 percent—the highest marketing-year extraction rate over those years was 75.9 percent for 1996/97. The 1996/97 marketing year, like recent years, was a year of high wheat prices.

Feed use varies. Feed use of wheat varies with price and crop quality. Feeding wheat to livestock increases when the wheat price premium between wheat and corn is narrow, which typically occurs in the summer, after winter wheat is harvested but before corn is harvested. The price premium can also narrow when wheat quality is impaired. The resulting price discounts reduce wheat’s value relative to corn. For example, when there is excessive rainfall at harvest time, some wheat varieties are susceptible to pre-harvest sprouting. When sprouting occurs, biochemical changes in the wheat kernel diminish baking qualities for food products, making the wheat unsuitable for milling for food use but still acceptable for livestock feed. Price discounts for sprout-damaged wheat facilitate its use as feed.

World market evolves. Longer term, growing global demand for wheat imports is concentrated in those developing countries where robust income and population growth underpin increases in demand. Such markets include Sub-Saharan Africa, Egypt, Pakistan, Algeria, Indonesia, the Philippines, and Brazil.

The number of major exporting countries that can supply these importers has expanded in recent years from the traditional exporters (the United States, Argentina, Australia, Canada, and the European Union). Ukraine, Russia, and Kazakhstan have become significant, but highly variable wheat exporters. These three Black Sea exporters together surpassed U.S. exports in 2009/10 and again in 2011/12 by 11.6 million metric tons (mmt) and 10.1 mmt, respectively. During the mid-1990s, their combined wheat exports were less than 5 mmt.

Low production costs and new investment in the agricultural sectors of the Black Sea region have enabled their world market share to climb, despite the region’s highly variable weather, which affects area, yield, and production. In 3 of the past 5 years, these Black Sea exporters produced about 100 mmt. In 2010 and 2012, drought reduced their output to 68 mmt and 63 mmt, respectively.

Future growth of wheat exports by Russia, though still rapid, is likely to be slower because of expanding hog/pork and poultry sectors resulting from recent policy decisions to limit the country’s imports of poultry and pork products. More wheat is expected to be used domestically to supply the expanding livestock sector.

Competition from Ukraine, Russia, and Kazakhstan, as well as the traditional exporting countries, has resulted in a declining U.S. share of expanding world exports. Since 1981 and 1982, when U.S. wheat exports accounted for about 45 percent of world exports, the U.S. export share has trended down, averaging about 20 percent over the last 3 years.

High U.S. wheat prices. In recent years, U.S. wheat prices have risen to unprecedented levels. This recent price rise, which began in 2007, resembles the surge of wheat prices in the early 1970s that plateaued until this 2007 price move. Wheat prices fluctuated widely following the 1970s surge, but the lows during this period were always well above wheat prices prior to the 1970s. Importantly, the prices of other agricultural commodities also rose to new price plateaus. The causes of the 1970s price increase and the recent price surge differed, but underlying each price rise was long-term higher demand for wheat and other commodities, including corn and soybeans.

Projections for U.S. Wheat Supply and Use

Long-term projections for U.S. wheat for 2014/15-2023/24 are heavily influenced by prospects for increased foreign competition in global markets and expectations for continued slow domestic yield gains. Both factors contribute to lower profitability than for other domestic crops, thereby leading to reduced U.S. wheat area.

Projected supplies increase throughout the projection. Supplies steadily increase even though acreage and production fall sharply until 2017/18. Higher beginning stocks and rising imports to 2017/18 more than offset reduced output. After 2017/18, supplies continue rise with production increasing (flat acreage, but higher yields) and steadily rising imports. The higher production and imports more than offset declining beginning stocks. Beginning stocks are falling as exports are expected to start increasing and domestic food use continues to rise with a growing U.S. population.

Area and yield assumptions. Planted area for 2014 is projected at 57 million acres. This 2014 planted area is expected to be larger than in 2013 because of good price incentives, including insurance-price guarantees. There were improved winter wheat planting conditions this past fall in those areas of Kansas and Oklahoma that had been suffering from drought conditions for 2 years.

The 10-year average harvested-to-planted ratio is 0.85. This ratio is used to calculate harvested area for all years in the projection period.

The average wheat yield for 2014 is projected at 45.8 bushels per acre. This projected yield is based on historical trends beginning in 1985. The assumed annual increase in wheat yields is 0.389 bushels per acre throughout the projection period, based on the same trend analysis of national wheat yields since 1985. By way of comparison, corn and soybean annual trend-yield gains are projected at nearly 2 bushels per acre and 0.45 bushels per acre, respectively.

Wheat plantings are expected to fall sharply early in the projection period. Wheat planted area is expected to fall each year through 2017. Planted area is expected to drop 2 million acres in 2016 and 2017, and then level off at 52 million acres for the rest of the projection.

Producer returns for wheat are expected to decline in 2014/15 – 2016/17, mostly due to lower prices. Returns then rise over the rest of the projections.

The components of the crop net returns calculation include yields, wheat price, and variable cost of production. As mentioned earlier, yields are assumed to grow at a steady, but slow pace throughout the projection period. The 2014/15 national season average price (SAP) is expected to drop $2.10 per bushel from the $7.00 expected for 2013/14. The SAP is expected to drop another 60 cents per bushel to a projection-period low of $4.30 per bushel in the following 2 years. The SAP is then expected to rise steadily to $5.35 per bushel by the end of the projection. The price increases are driven by falling ending stocks as U.S. wheat exports begin to increase year to year in 2017/18 for the remainder of the projection. Planted area is expected to fall early in the projection period and then hold steady for the remainder of the projection because of better returns for competing crops.

Wheat production is expected to decline after 2014 because of falling area, then rise slowly with higher yields. Projected production falls from 2,220 million bushels in 2014 to a low of 2,080 million bushels in 2017, as falling area more than offsets gradually rising yields. Loss of planted area is expected to end in 2018 as the wheat SAP begins to rise. The price increases are driven by falling ending stocks as U.S. wheat exports begin to increase year to year in 2017/18 for the remainder of the projection. Expected production then slowly rises to 2,185 million bushels by 2023 with rising yields.

Projected imports and ending stocks. Imports are projected to rise steadily to more than 200 million bushels in 2023/24. Elimination of the Canadian Wheat Board’s state trading monopoly is expected to shift some of Canada’s wheat exports to the United States. Carrying stocks are projected to rise early in the period, increasing 229 million bushels between 2014/15 and 2017/18, as projected uses drop more than production. Carrying stocks then begin to decline with rising food use and rising exports.

Total wheat use is projected to drop to a projection-period low in 2015/16, then increase slowly over the rest of the period. Total use is expected to drop from 2,283 million bushels in 2013/14 to 2,252 million bushels in 2015/16 because of a projected decrease in domestic use as declining feed and residual use more than offsets rising food use. Food use is projected to increase with the growth of U.S. population throughout the projection.

Projected exports for 2014/15 to 2016/17, at 1,025 million bushels, are the lowest of the projection. Exports are projected to begin rising slowly after 2016/17 to 1,115 million bushels at the end of the projection. Despite this rise in U.S. wheat exports, the U.S. share declines over the projection because world wheat trade is projected to grow faster. The U.S. share of world trade is 18.6 percent in 2014/15 and is 17.1 percent by the end of the projection. For comparison, Russia’s share is 10.6 percent in 2014/15 and 15.5 percent at the end of the projection.

Domestic use is projected to decline early in the projection with an expected decrease in feed and residual use. Then as feed and residual levels off at 190 million bushels in 2015/16 and beyond, domestic use rises with the increase in food use. Food use is projected to grow as population growth drives food use higher. Per capita food use of wheat holds constant over the projection period. Projected prices are high enough that continued high extraction rates are expected over the projection period.

Ending stocks steady through the projections. Ending stocks are projected to rise quickly to a peak of 794 million bushels in 2016/17, then drop steadily to 713 million bushels in 2023/24. The increase in ending stocks stops when U.S. exports begin to rise in 2016/17. In comparison, in 2007/08 (the year of worldwide wheat shortages), U.S. ending stocks were only 306 million bushels, the lowest since the mid-1940s.

Projections for World Wheat Trade

The USDA baseline also provides projections for global trends in wheat trade. The following discussion on wheat trade is from the Global Agricultural Trade chapter of the Agricultural Baseline Projections topic page. A table is provided in the Appendix showing projected imports and exports for selected countries.

World wheat imports to grow. World wheat trade (which includes flour) is projected to expand by nearly 28 million tons (19 percent) between 2014/15 and 2023/24, rising to 177.5 million tons. Growth in wheat imports is concentrated in those developing countries where income and population gains drive increases in demand. The largest growth markets include the 15 countries of the Economic Community of West African States, other Sub-Saharan African countries, Egypt, other countries in the North Africa and the Middle East region, Indonesia, and Pakistan.

In many developing countries, almost no change in per capita wheat consumption is expected, but imports are projected to expand modestly because of population growth and limited potential to expand wheat production. As incomes rise in Indonesia, Vietnam, and some other Asian countries, consumers shift marginally from rice to wheat.

Egypt remains the world’s largest wheat-importing country, with imports climbing to 12 million tons by 2023/24. Imports by Indonesia grow rapidly to nearly 10 million tons and it replaces Brazil as the second-largest wheat importing country.

Imports by Vietnam and Bangladesh are both projected to rise rapidly, increasing by a total of 1.5 million tons. Partially offsetting this increase are lower projected imports by Japan and South Korea.

Imports by countries in Africa and the Middle East rise 14 million tons and account for half of the total increase in world wheat trade. Saudi Arabia has adopted a policy to phase out wheat production by 2016 because of water scarcity concerns, so its imports are projected to rise to 3.8 million tons by 2023/24.

Historically, India has been a large wheat importer in some years and a large exporter in others. In the past 2 years, India has exported significant amounts of wheat, partially as a result of high price-support policies and excess government stocks. These policies are expected to continue in some form, although exports are projected to decline during the coming decade.

World wheat exporter competition to increase. The five largest traditional wheat exporters (United States, Australia, the EU, Argentina, and Canada) are projected to account for more than 60 percent of world trade in 2023/24, compared with nearly 70 percent during the last decade. This decrease is mostly due to increased exports from the former Soviet Union (FSU).

U.S. wheat exports are projected to generally be in a 28- to 30-million-ton range during the coming decade. However, the U.S. share of world exports declines over the projection period.

Canada’s wheat area continues to decline slowly in response to more favorable returns for canola. As a result, little change is projected for Canadian wheat exports. Eliminating the Canadian Wheat Board’s state trading monopoly is assumed to result in redirection of some of Canada’s wheat exports to the United States due to transportation and market considerations.

In Argentina, some area traditionally planted to wheat shifts to barley in response to government policies and increased double-cropping of barley. Exports rebound in 2013/14 and 2014/15 after production shortfalls the previous 2 years, but then remain flat during the rest of the projection period.

The EU is the only traditional exporter whose market share is projected to increase. EU wheat exports are projected to trend upward and surpass 30 million tons by 2023/24 as less wheat is fed to livestock due to relatively low feed grain prices.

The upward trend in wheat exports from Russia, Ukraine, and Kazakhstan was interrupted by droughts in 2010 and 2012. However, exports from those countries are expected to recover and rise more than 50 percent, climbing to 52 million tons by 2023/24 and accounting for two-thirds of the projected increase in world wheat trade. Rising domestic feed use prevents even more rapid export growth. Although not explicitly reflected in the projections, continued year-to-year volatility in wheat production and trade is likely because of the region’s highly variable weather and yields.

Market forces constrain growth in U.S. wheat sector. The U.S. wheat sector is facing long-term challenges as productivity gains and producer returns for competing field crops outpace those for wheat. Over the next 10 years, the planted area of U.S. wheat is projected to fall. Wheat yield enhancements are expected to continue to lag those for competing row crops, primarily corn and soybeans. U.S. exports are expected to show little growth with the increased trade competition, particularly from Russia, Ukraine, and Kazakhstan. Furthermore, domestic food use, although growing, no longer provides the dynamic market growth experienced from the 1970s through the mid-1990s.